Malpiede v. Townson

• Decision Date: 27 August 2001
• Docket Number: No. 80, 2000.,80, 2000.
• Citation: 780 A.2d 1075
• Parties: Lu V. MALPIEDE, Neil Malpiede, Julie S. Karchin, JJL Partners, Mary Jane Howard, and Roger H. Papazian, Plaintiffs Below, Appellants, v. George W. TOWNSON, Richard O. Starbird, Hugh W. Hunter, William J. Barrett, Merle A. Johnston, Royalty Acquisition Corp., Royalty Corporation, and Knightsbridge Capital Corporation, Defendants Below, Appellees.
• Court: Supreme Court of Delaware

780 A.2d 1075

Lu V. MALPIEDE, Neil Malpiede, Julie S. Karchin, JJL Partners, Mary Jane Howard, and Roger H. Papazian, Plaintiffs Below, Appellants, v. George W. TOWNSON, Richard O. Starbird, Hugh W. Hunter, William J. Barrett, Merle A. Johnston, Royalty Acquisition Corp., Royalty Corporation, and Knightsbridge Capital Corporation, Defendants Below, Appellees.

No. 80, 2000.

Supreme Court of Delaware.

Submitted:¹ April 3, 2001.

Decided: August 27, 2001.

Norman M. Monhait, Esquire (argued), of Rosenthal Monhait Gross & Goddess, P.A., Wilmington, Delaware; Of Counsel: Goodkind Labaton Rudoff & Sucharow LLP, New York, New York; Lowey Dannenberg Bemporad & Selinger, P.C., White Plains, New York; Law Offices of Jeffrey S. Abraham, New York, New York; Hanzman Criden Korge Chaykin Ponce & Heise, P.A., Miami, Florida; Schubert & Reed, LLP, San Francisco, California; Cohn Lifland Pearlman Herrmann & Knopf, Saddle Brook, New Jersey, for Appellants.

William D. Johnston, Esquire (argued), John W. Shaw, Esquire, and Danielle B. Gibbs, Esquire, of Young, Conaway, Stargatt & Taylor, Wilmington, Delaware, for Appellees Royalty Acquisition Corp., Royalty Corp., and Knightsbridge Capital Corp.

A. Gilchrist Sparks, Esquire, Jon E. Abramczyk, Esquire (argued), and Jeffrey R. Wolters, Esquire, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, for Appellees George W. Townson, Richard O. Starbird, William J. Barrett, and Merle A. Johnston.

Stephen E. Jenkins, Esquire, of Ashby & Geddes, Wilmington, Delaware, Attorney for Appellee Hugh Hunter. Before VEASEY, Chief Justice, WALSH, HOLLAND, BERGER, and STEELE, Justices, constituting the Court en Banc.

VEASEY, Chief Justice.

In this appeal, we affirm the holding of the Court of Chancery that allegations in the class action complaint challenging a merger do not support the plaintiff stockholders' claims alleging: (1) breaches of the target board's duty of loyalty or its disclosure duties; and (2) aiding and abetting or tortious interference by the acquiring corporation. We further affirm the granting of a motion to dismiss the plaintiffs' due care claim on the ground that the exculpatory provision in the charter of the target corporation authorized by 8 Del. C. § 102(b)(7), bars any claim for money damages against the director defendants based solely on the board's alleged breach of its duty of care. Accordingly, we affirm the judgment of the Court of Chancery dismissing the amended complaint.

With respect to the dismissal based on the exculpatory effect of the Section 102(b)(7) charter provision, we had an initial concern about the propriety of the trial court's consideration of the exculpatory charter provision on a Rule 12(b)(6) motion to dismiss because it is a matter outside the complaint. Although presentation of matters outside the pleadings required the court to convert the Defendants' motion to dismiss into a motion for summary judgment, the failure to do so was not reversible error. Because the plaintiffs do not contest the existence, terms, validity or authenticity of the Frederick's exculpatory charter provision, we hold that the charter provision was properly before the Court of Chancery, which correctly held that the plaintiffs' due care claim was barred. Accordingly, we affirm the judgment of the Court of Chancery.

Facts

Frederick's of Hollywood ("Frederick's") is a retailer of women's lingerie and apparel with its headquarters in Los Angeles, California.² This case centers on the merger of Frederick's into Knightsbridge Capital Corporation ("Knightsbridge") under circumstances where it became a target in a bidding contest. Before the merger, Frederick's common stock was divided into Class A shares (each of which has one vote) and Class B shares (which have no vote). As of December 6, 1996,³ there were outstanding 2,995,309 Class A shares and 5,903,118 Class B shares. Two trusts created by the principal founders of Frederick's, Frederick and Harriet Mellinger (the "Trusts"), held a total of about 41% of the outstanding Class A voting shares and a total of about 51% of the outstanding Class B non-voting shares of Frederick's.⁴

On June 14, 1996, the Frederick's board announced its decision to retain an investment bank, Janney Montgomery Scott, Inc. ("JMS"), to advise the board in its search for a suitable buyer for the company. In January 1997, JMS initiated talks with Knightsbridge.⁵ Four months later, in April 1997, Knightsbridge offered to purchase all of the outstanding shares of Frederick's for between $6.00 and $6.25 per share. At Knightsbridge's request, the Frederick's board granted Knightsbridge the exclusive right to conduct due diligence.

On June 13, 1997, the Frederick's board approved an offer from Knightsbridge to purchase all of Frederick's outstanding Class A and Class B shares for $6.14 per share in cash in a two-step merger transaction.⁶ The terms of the merger agreement signed by the Frederick's board prohibited the board from soliciting additional bids from third parties, but the agreement permitted the board to negotiate with third party bidders when the board's fiduciary duties required it to do so.⁷ The Frederick's board then sent to stockholders a Consent Solicitation Statement recommending that they approve the transaction, which was scheduled to close on August 27, 1997.

On August 21, 1997, Frederick's received a fully financed, unsolicited cash offer of $7.00 per share from a third party bidder, Milton Partners ("Milton"). Four days after the board received the Milton offer, Knightsbridge entered into an agreement to purchase all of the Frederick's shares held by the Trusts for $6.90 per share.⁸ Under the stock purchase agreement, the Trusts granted Knightsbridge a proxy to vote the Trusts' shares, but the Trusts had the right to terminate the agreement if the Frederick's board rejected the Knightsbridge offer in favor of a higher bid.⁹

On August 27, 1997, the Frederick's board received a fully financed, unsolicited $7.75 cash offer from Veritas Capital Fund ("Veritas"). In light of these developments, the board postponed the Knightsbridge merger in order to arrange a meeting with the two new bidders. On September 2, 1997, the board sent a memorandum to Milton and Veritas outlining the conditions for participation in the bidding process. The memorandum required that the bidders each deposit $2.5 million in an escrow account and submit, before September 4, 1997, a marked-up merger agreement with the same basic terms as the Knightsbridge merger agreement. Veritas submitted a merger agreement and the $2.5 million escrow payment in accordance with these conditions. Milton did not.¹⁰

On September 3, 1997, the Frederick's board met with representatives of Veritas to discuss the terms of the Veritas offer. According to the plaintiffs, the board asserts that, at this meeting, it orally informed Veritas that it was required to produce its "final, best offer" by September 4, 1997. The plaintiffs further allege that that board did not, in fact, inform Veritas of this requirement.

The same day that the board met with Veritas, Knightsbridge and the Trusts amended their stock purchase agreement to eliminate the Trusts' termination rights and other conditions on the sale of the Trusts' shares. On September 4, 1997, Knightsbridge exercised its rights under the agreement and purchased the Trusts' shares. Knightsbridge immediately informed the board of its acquisition of the Trusts' shares and repeated its intention to vote the shares against any competing third party bids.

One day after Knightsbridge acquired the Trusts' shares, the Frederick's board participated in a conference call with Veritas to discuss further the terms of the proposed merger. During this conference call, Veritas representatives suggested that, if the board elected to accept the Veritas offer, the board could issue an option to Veritas to purchase authorized but unissued Frederick's shares as a means to circumvent the 41% block of voting shares that Knightsbridge had acquired from the Trusts. Frederick's representatives also expressed some concern that Knightsbridge would sue the board if it decided to terminate the June 15, 1997 merger agreement. In response, Veritas agreed to indemnify the directors in the event of such litigation.

On September 6, 1997, Knightsbridge increased its bid to match the $7.75 Veritas offer, but on the condition that the board accept a variety of terms designed to restrict its ability to pursue superior offers.¹¹ On the same day, the Frederick's board approved this agreement and effectively ended the bidding process. Two days later, Knightsbridge purchased additional Frederick's Class A shares on the open market, at an average price of $8.21 per share, thereby acquiring a majority of both classes of Frederick's shares.

On September 11, 1997, Veritas increased its cash offer to $9.00 per share. Relying on (1) the "no-talk" provision in the merger agreement, (2) Knightsbridge's stated intention to vote its shares against third party bids, and (3) Veritas' request for an option to dilute Knightsbridge's interest, the board rejected the revised Veritas bid. On September 18, 1997, the board amended its earlier Consent Solicitation Statement to include the events that had transpired since July 1997. The deadline for responses to the consent solicitation was September 29, 1997, the scheduled closing date for the merger.

Before the merger closed, the plaintiffs filed in the Court of Chancery the purported class action complaint that is the predecessor of the amended complaint before us. The plaintiffs also moved for a temporary restraining order enjoining the merger. The Court of Chancery denied the requested injunctive relief.¹²

The plaintiffs then amended their complaint to include a class action claim for damages caused by the termination of the auction in favor of Knightsbridge and the rejection of the higher Veritas offer. The...